The INR Value Accelerates as the Dollar Loses Ground on Weak Manufacturing Data

The Indian Rupee made significant gains at the start of the week, reversing a three-day losing streak. The USD/INR rate settled around 90.35, while the Dollar Index (DXY) sharply declined, hitting a three-week low of 98.86. This movement marks a correction in the INR’s value, reflecting changes in global market fundamentals. The dollar’s weakening coincides with a renewed risk appetite among investors, who are reducing their preference for safe-haven currencies like the USD.

This dynamic was driven by a series of macroeconomic factors. Last week, the dollar benefited from a risk-off wave due to geopolitical tensions in Latin America and their impact on financial markets. However, deteriorating US economic prospects reversed this trend, as investors recalibrated their positions.

Weak US Economic Data Erodes USD Value

US manufacturing data marked a crucial turning point. The December ISM Manufacturing PMI fell to 47.9 from 48.2 in November, disappointing economists who had expected a slight improvement to 48.3. This decline indicates a significant contraction in US manufacturing activity, negatively affecting secondary indicators such as New Orders and Employment data.

Persistent manufacturing weakness has created uncertainty about the US economic trajectory. Markets are beginning to price in scenarios of further weakness in the US labor market, a key factor for the Fed. In 2025, the Federal Reserve has already cut its policy rate three times, bringing the range to 3.50%-3.75% to support a decelerating labor market. UBS recently forecasted additional cuts in the second half of the year, shifting their projections from January and September to July and October.

Regarding inflation, UBS expects core CPI to rise by 44 basis points in December, 50 basis points in January, and 30 basis points in February. These data will support the Fed’s monetary policy decisions in the coming months. The upcoming Nonfarm Payrolls report on Friday will be a key catalyst for assessing the health of the US labor market.

Indian Rupee Rebounds: Trade Pressures and Capital Outflows

Although the INR has technically rebounded, underlying pressures remain significant. US-India trade tensions continue to weigh on the Rupee. President Trump has threatened further tariff hikes if India continues importing Russian oil, creating uncertainty around bilateral trade relations.

Meanwhile, Foreign Institutional Investors (FII) have continued reducing their exposure to Indian equities. In the first three sessions of January, FIIs recorded net sales of ₹3,015.05 crore. Although Monday’s outflows were more modest (₹36.25 crore), long-term pressure on foreign capital flows remains a destabilizing factor for the Rupee’s value.

Technical Outlook: USD/INR Maintains Dynamic Supports

On the technical front, USD/INR is trading at 90.3765, slightly above the 20-day exponential moving average (EMA) at 90.2305. This level continues to serve as a dynamic support, providing a base for resistance against downside moves despite recent declines. The EMA’s slope has stabilized, suggesting a balance between bullish and bearish forces in the short to medium term.

The 14-period Relative Strength Index (RSI) stands at 55.20, indicating a neutral position without overbought conditions. This leaves room for further movement in either direction. If USD/INR stabilizes and closes consistently above the 20-day EMA, it could rally toward the all-time high of 91.55. Conversely, a daily close below the support of the moving average would turn sentiment bearish, with potential further declines toward December’s low of 89.50.

The dynamics of this pair will continue to depend on macroeconomic factors—US economic data, Fed decisions—as well as regional issues such as trade tensions and foreign capital flows into Indian markets. The INR’s value will likely reflect this complex mix of fundamental and technical forces in the near term.